How disruptive can Bitcoin be for banking?

Daniel Cawrey at CoinDesk has a piece up that questions whether banks are concerned at all by the disruptive technologies that are Bitcoin and other digital currencies. And if so, what will the banks do about this?

35 Total views

0Total shares

Daniel Cawrey at CoinDesk has a piece up that questions whether banks are concerned at all by the disruptive technologies that are Bitcoin and other digital currencies. And if so, what will the banks do about this?

Let’s be clear, first: Cryptocurrencies are a disruptive technology, and they have the potential to shake up an old and stable institution, banks.

For the moment, Cawrey writes, banks have little incentive to even deal with Bitcoins, and plenty of reasons to stay away. The fact that Bitcoin is decentralized and unregulated makes it incompatible with many aspects of traditional banking.

Furthermore, banks can certainly work with Bitcoin businesses, but at what cost and what benefit to the bank? At the moment, Bitcoin is a small currency, comparatively, and Bitcoin businesses pose any number of risks to cooperating banks simply by failing to comply with existing regulations.

Regulations that are themselves not always compatible with the currency.

Fraud is another concern for banks, which have built their own fraud protection systems and might view Bitcoins as a Trojan horse that could penetrate their protections. The risks are just too big right now, and the rewards too small.

That means Bitcoin companies have to take it upon themselves to ensure regulation compliance. This isn’t easy, as some regulations are not designed to embrace this technology, so a lot of grey areas appear.

For an entrepreneur in the Bitcoin space, that means there is still a need to do whatever is necessary to get the business to succeed, but there is also the separate need to strictly adhere to any and all applicable rules, lest the business gets shut out for even benevolent noncompliance.

As such, the risk-averse banking industry’s responses to Bitcoin’s innovations will probably take a while. Participants in the startup space, however, are operating under completely different paradigms, preferring to fail quickly and iterate. Banks cannot tolerate these wild swings.

Cawrey suggests two immediate possibilities. The first option is for banks and traditional financial institutions to slowly adopt some of the proven elements from Bitcoin, allowing the digital currency economy to serve as a proving ground or financial D-League.

The other option is to makeover the façade of banking: Simplify the thing and at least make it appear user-friendly.

Nevertheless, change is a long time coming. Whether banking is resilient to change or a dinosaur remains to be seen.